The yin and yang of China's economic growth
Andrew Yao says if China can balance increased productivity, innovation, social stability and regional economic development, rising per capita GDP will drive the country's growth
During last month's National People's Congress and Chinese People's Political Consultative Conference meetings, there was quite a bit of discussion about China's slowing GDP growth forecast, which was lowered to seven per cent. Speculation about the impact of slower growth had sparked international debate about China's ability to manage what is now the "new normal" and markets are awaiting signs of what the next phase of economic development will be like.
For decades, China experienced rapid and unprecedented growth, rising in the ranks to become one of the largest trading nations in the world. When compared to the US, what is remarkable is that China's total GDP is still lower, yet government debt only accounts for 40 per cent of GDP. With the projected slowdown, China must focus on the quality of growth, rather than quantity. According to state forecasts, China's projected GDP will be 5.4 per cent by 2025, while average growth is expected to be 6.2 per cent over the next 10 years. This projected slowdown is causing many to wonder if China will fall into the middle-income trap.
In the past, rapid growth brought a plethora of problems, including: an overdependence on an investment-driven economy; hidden risks in the economic and financial systems that are being gradually exposed; pollution; rampant corruption; and, inadequate protection of intellectual property rights.
The authorities are fully aware that the current growth model is not sustainable and have started work on addressing the "new normal". President Xi Jinping is leading the drive and has emphasised the importance of quality rather than speed of growth. Local governments are pushing to encourage innovation, culture, entrepreneurship, environmental protection and government restructuring. Last year's economic data reflected that the service industry is one of the largest economic pillars in China, accounting for 48 per cent of GDP. China is now at a historic juncture, trying to transition from a fixed-asset investment-based economy to one driven by consumption, services and domestic demand.
Based on 2014 figures, China's GDP per capita was only 20 per cent of the United States', and consumption per capita only 25 per cent. China must increase productivity and promote industrial upgrades, as well as provide incentives for innovation in business. On the other hand, maintaining social stability and ensuring the balanced economic development of the different regions are also of paramount importance. This is what I call the "yin and yang" balance. If this delicate balance can be maintained, income per capita will increase and drive the growth of GDP per capita.
Increasing productivity is a combination of many factors: finding the right talent, effective corporate management, excellence in operation, and an open and transparent government management system. Beijing recognises that it plays a vital role in attracting and grooming talent. For instance, it continues to invest significant resources into education in Central and Western regions, by increasing the quality of education of domestic universities, bringing them up to the standard of world-class universities. This initiative will elevate China's manufacturing and service industries via improved labour productivity per capita, and thus competitiveness.
China recently proposed a very ambitious "one belt, one road" initiative and the creation of the Asian Infrastructure Investment Bank. This initiative will form an East-West transportation corridor linking the Pacific Ocean and the Baltic Sea. By investing in industries like energy, aviation and infrastructure, the inner and outer regions of Eurasia will be connected, bringing down the barriers to trade and bringing about financial integration. This will benefit two-thirds of the global population and deliver a winning scenario to countries along the corridor.
On one hand, this initiative can lead to the export of China's excess steel and cement for infrastructure development; on the other, it can accelerate the internationalisation of the renminbi, reduce the need for large foreign exchange reserves, and minimise the risk of depreciation in the US dollar.
More importantly, "one belt, one road" paves the way for Beijing to use geoeconomics instead of geopolitics to seek a greater say in regional affairs. Considering its economic clout, China can, and should play a bigger role in global issues (including environmental protection, climate change, anti-terrorism and liberalisation of world trade).
It is also worth noting that when Alibaba was listed in the US last year, the world took notice and was amazed by the speed and development of e-commerce in China. Over the next five years, 10 billion devices will be connected to the Internet of Things, creating massive data needs. The integration of mobile internet and social media will afford the traditional industries new development opportunities and a move forward to Internet Plus.
What is Hong Kong's role in all this? Hong Kong has been a leading international financial centre, as well as one of the world's largest trading economies. Looking forward, the SAR should give full play to the spirit of innovation, embrace trends and enhance skills in the mobile and internet markets. In March, Guangdong opened 95 per cent of its service and trade market to Hong Kong and granted preferential treatment to Hong Kong companies. Hong Kong should fully utilise new regulations to the Closer Economic Partnership Agreement to develop and expand businesses in mainland China. In another sign of cooperation, the Shanghai and Hong Kong governments recently signed another series of trade and finance agreements. Hong Kong's finance and service industries should seize this opportunity, to bring Hong Kong's advanced financial services to Shanghai.
The fully utilised quota for the Shanghai-Hong Kong Stock Connect and the recent rallies in both markets reflect that collaboration can create a win-win outcome.
Once a clear nationwide objective is set, there will be unwavering support from the national leadership, which in turn will motivate individuals, communities, enterprises and local governments to align to the same objective. China's economic transformation to the "new normal" will continue to deliver progress and success to its citizens and the world.
